Yokl: New Realities of Capital Spend in Healthcare Today

I just read a new report on healthcare 2011 capital spend published by the Healthleaders Media Council (HMC) which clearly demonstrates that “the times they are-a-changin”, as Bob Dylan would say, in the healthcare financing marketplace due to the great recession.  Money is tight, and capital budgets are being squeezed as a result of the downturn in the economy and the uncertainty about the future of healthcare under ObamaCare.

It should be no surprise that 39% of the respondents to HMC’s survey say that EMR systems will receive the majority of capital funds this coming year, thereby pushing out millions of dollars of other capital purchases. New building programs are taking a back seat to all other capital purchases, at most healthcare organizations, for the foreseeable future.

There is also a big push to allocate capital dollars to improve quality of care because it is believed that the ROI will be significant by doing so. Overall a decrease of 38% in capital spend is predicted at hospitals, systems and IDN’s that are feeling the financial pain nationwide. It’s interesting to note that 15% of the respondents to HMC’s survey said they were still thinking about EMR initiatives or computerized physician order systems.  For the most part, this realignment of capital funds is centered on the financial incentives and disincentives that will be brought about by ObamaCare legislation.

The big elephant in the room is where will these capital funds come from? It seems that the majority of healthcare organizations believe they can secure funding from some source (i.e. tax exempt bonds, capital leases, bank loans, sales of real estate, etc.), but most have faith in it coming from internal sources (operating and non-operating cash flow). The big “aha” was that 47% of the respondents were betting on charitable donations and endowments to fill the gap. I guess you can say “what comes around, goes around” with this source of funding which was ignored and neglected for many, many years.

I also found it interesting to see how healthcare organizations prioritize their capital decisions. Most rank improvement of quality as their first choice, and then replacement need, with return-on-investment taking third place.  I see this as an upside down way to make capital decisions when ROI should always be a key factor (but not the only factor) in any buying decision, otherwise why would you make the investment?

Overall, my impression of HMC’s report was that I thought the healthcare marketplace was making prudent, rational and market-driven decisions on their capital spend for 2011 where the rules are changing faster than we can have time to internalize them.  It will be interesting to see how these capital decisions play out over the next few years when the rubber hits the road.  Until then fasten you safety belts!

Robert T. Yokl

Chief Value Strategist

Strategic Value Analysis® in Healthcare

www.strategicva.com

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